Brian Milovich

Real Estate Investor, Co-Founder @calverapartners
Opinions are my own and posts are not investing advice.

[The Registry @theregistrysf]

Calvera Partners' $26MM Willow Glen Deal Exemplifies Value-Add Strategy in Rebounding Bay Area Market
Private equity firm Calvera Partners is... #BAYAREA #CALVERAPARTNERS #REALPAGE #SANJOSE #SILICONVALLEY #SOUTHBAY #WILLOWGLEN
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[Brian Milovich @BrianMilovich]

I wonder how long until the focus is back on supply-constrained markets?

There's clearly growth in the Sunbelt, and supply there is waning. It will still grow, and likely at a rate better than the national average. But it will remain a crowded field to generate above-average risk-adjusted returns.

We're already seeing substantial rent growth in supply-constrained markets (also primary markets)...SF Bay Area, Boston, NY, etc.

These areas have plenty of political risk and they're difficult to operate in. That provides another barrier for non-local groups to get comfortable with--they won't. For risk-adjusted returns in the short-term, I'd focus on places where supply has historically been low.

[Brian Milovich @BrianMilovich]

I've been wondering lately how many multifamily sponsors are tied to Sunbelt markets only.

The Sunbelt had the strongest growth trajectory over the past ~5 years. It also has the deepest dive in rents at the moment. Looking at RealPage, Inc. data, the Sunbelt is projected to have the strongest rent growth, once this supply wave subsides.

How long can those sponsors wait for the market to improve?

How much of a drag is their current portfolio on future decision-making?

Is it worth considering new markets for those sponsors?

Thankfully, @calverapartners, we're in other markets that are currently experiencing real rent growth. We remain bullish on the Sunbelt, but the markets in our backyard have good prospects today.

[Brian Milovich @BrianMilovich]

I've been wondering lately how many multifamily sponsors are tied to Sunbelt markets only.

The Sunbelt had the strongest growth trajectory over the past ~5 years. It also has the deepest dive in rents at the moment. Looking at RealPage, Inc. data, the Sunbelt is projected to have the strongest rent growth, once this supply wave subsides.

How long can those sponsors wait for the market to improve?

How much of a drag is their current portfolio on future decision-making?

Is it worth considering new markets for those sponsors?

Thankfully, @calverapartners, we're in other markets that are currently experiencing real rent growth. We remain bullish on the Sunbelt, but the markets in our backyard have good prospects today.

[Brian Milovich @BrianMilovich]

We've been underwriting smaller apartment deals again.

The market for those deals can either be super inefficient, or you get the random 1031-buyer who blows everyone out of the water. But the mis-priced deals can be really significant.

After years of owning everything from 7-units to 307-units, I'm not sure the smaller assets are more difficult to manage. Property size/scale certainly has an impact on the expense side. But, it's easier to manage and plan for larger capital events in smaller buildings.

We're looking for pricing inefficiencies across the spectrum. And we're seeing more opportunities down the size spectrum.

[Brian Milovich @BrianMilovich]

Since when did AAR (average annual return) become a thing?

I've seen this in so many syndicator pitch books lately, and I don't get it.

Is IRR too complicated? Is your deal's IRR too low and you need another metric that's higher?

Can someone get in and out of your deal like a REIT where the timeframe depends on the investor, not the sponsor?

If you need another metric to pump up your deal, it's probably not a deal worth pumping up.

[Brian Milovich @BrianMilovich]

Since when did AAR (average annual return) become a thing?

I've seen this in so many syndicator pitch books lately, and I don't get it.

Is IRR too complicated? Is your deal's IRR too low and you need another metric that's higher?

Can someone get in and out of your deal like a REIT where the timeframe depends on the investor, not the sponsor?

If you need another metric to pump up your deal, it's probably not a deal worth pumping up.

[Brian Milovich @BrianMilovich]

We've been underwriting smaller apartment deals again.

The market for those deals can either be super inefficient, or you get the random 1031-buyer who blows everyone out of the water. But the mis-priced deals can be really significant.

After years of owning everything from 7-units to 307-units, I'm not sure the smaller assets are more difficult to manage. Property size/scale certainly has an impact on the expense side. But, it's easier to manage and plan for larger capital events in smaller buildings.

We're looking for pricing inefficiencies across the spectrum. And we're seeing more opportunities down the size spectrum.

[Brian Milovich @BrianMilovich]

Conviction.

It's a word that gets thrown around a lot in investing.

Everybody says they have conviction, but do they really?

I saw a post over the weekend where someone said, "If you're only 50% of the way in, you're 100% of the way out."

You're either in or you're out. We see this in ourselves when evaluating multifamily deals in various markets.

For example, I'd love to re-enter a certain Sunbelt market. But the thought of declining NOI or a longer runway to get back to an environment with little-to-no? That's a tough sell. Might there be great deals because of this? Sure, but not at the cap rates necessary to win. So, I'm half in...which really means I'm all out.

On the flip side, I'm 100% in other markets. And our recent offers reflect that. We're getting close to acting on our conviction at Calvera Partners in 2025.

[Brian Milovich @BrianMilovich]

Why isn’t capital rushing out of the Sunbelt and into the Midwest and coastal markets for multifamily? The latest rent stats say that’s where rents are growing the most.

Because pivoting is hard.

If you’re not physically located, or don’t have a history in those markets, you don’t drop everything and proclaim “I’m all in on Kansas City!” You also don’t say “San Francisco rent control is no biggie” if you’ve never dealt with rent control anywhere before.

Your investors are also skeptical of a major pivot, as they should be.

It’s hard to wait for a recovery in your market, though your location expertise (wherever that may be) is what generates a premium return.

[Brian Milovich @BrianMilovich]

Why isn’t capital rushing out of the Sunbelt and into the Midwest and coastal markets for multifamily? The latest rent stats say that’s where rents are growing the most.

Because pivoting is hard.

If you’re not physically located, or don’t have a history in those markets, you don’t drop everything and proclaim “I’m all in on Kansas City!” You also don’t say “San Francisco rent control is no biggie” if you’ve never dealt with rent control anywhere before.

Your investors are also skeptical of a major pivot, as they should be.

It’s hard to wait for a recovery in your market, though your location expertise (wherever that may be) is what generates a premium return.

[Brian Milovich @BrianMilovich]

When do owners of small apartment properties often out-smart bigger operators...

...when there's a vacancy.

We’re told that owning a 200-unit property is better than owning a 20-unit one. Bigger assets come with economies of scale—and one vacant unit barely registers. But at a 20-unit property, one vacancy is 5% of your total. That hurts.

Many large operators rely on rent-setting algorithms to keep vacancies low. That can mean big swings in asking rents just to fill units.

Smaller owners? They feel the vacancy immediately—and act fast. When you’re operating lean, there’s no time to wait around.

Meanwhile, big owners without those algorithms (which are getting banned in more places) tend to move slower. They’ll test out concessions, maybe offer a few “loss leader” units, or push leasing teams with incentives.

We’re seeing this play out in Sunbelt markets with rising vacancies. Most large owners won’t slash rents right away. It’s just not how they operate.

But small owners will. They know how it hits cash flow. They’re not answering to outside investors or worried about setting a low rent floor for a future sale.

Sometimes, it pays to think like the small guys.

[Brian Milovich @BrianMilovich]

When do owners of small apartment properties often out-smart bigger operators...

...when there's a vacancy.

We’re told that owning a 200-unit property is better than owning a 20-unit one. Bigger assets come with economies of scale—and one vacant unit barely registers. But at a 20-unit property, one vacancy is 5% of your total. That hurts.

Many large operators rely on rent-setting algorithms to keep vacancies low. That can mean big swings in asking rents just to fill units.

Smaller owners? They feel the vacancy immediately—and act fast. When you’re operating lean, there’s no time to wait around.

Meanwhile, big owners without those algorithms (which are getting banned in more places) tend to move slower. They’ll test out concessions, maybe offer a few “loss leader” units, or push leasing teams with incentives.

We’re seeing this play out in Sunbelt markets with rising vacancies. Most large owners won’t slash rents right away. It’s just not how they operate.

But small owners will. They know how it hits cash flow. They’re not answering to outside investors or worried about setting a low rent floor for a future sale.

Sometimes, it pays to think like the small guys.

[Brian Milovich @BrianMilovich]

What sort of cushion does an investor need to have for interest rates when underwriting a new multifamily deal today?

Daily 10bp swings up and down make it difficult to plan when you have to factor in a negotiating period, due diligence time, and the closing stretch. That's around 90 total days.

So, what do firms do? They over cushion, and that hurts values.

Others may even attempt to insert pre-negotiated re-trades into a contract based on where a company can lock the interest rate. If the seller really wants to transact, they'll consider this.

Attractive (competitive in rate and leverage) loan assumptions provide good certainty for now.

[Brian Milovich @BrianMilovich]

The spread between vintage deals (even if well located) and new(ish) construction remains wide.

It's music to my ears to hear brokers suggest a stabilized 6.5% cap on vintage properties. With agency debt around 5% for deals that have a high workforce component, that's potential for a nice cash yield.

We're taking a harder look at those deals again...and seeing if those 6.5% stabilized yields are realistic.

[Brian Milovich @BrianMilovich]

The spread between vintage deals (even if well located) and new(ish) construction remains wide.

It's music to my ears to hear brokers suggest a stabilized 6.5% cap on vintage properties. With agency debt around 5% for deals that have a high workforce component, that's potential for a nice cash yield.

We're taking a harder look at those deals again...and seeing if those 6.5% stabilized yields are realistic.

[Brian Milovich @BrianMilovich]

So many multifamily deals that we see today have a "gain" to lease...meaning, the in place rents are higher than today's market rents.

This makes sense. Rents spiked in 2021 and many were able to reset their rent rolls higher. Then, a supply wave in 2024 increased competition and forced rents down for new tenants moving in. The existing tenants are often paying higher rents than new tenants.

This isn't a new phenomenon. In many markets there are always specials to encourage new leases, or certain times of the year when incentives are needed (think January in Minnesota).

Today, though, the spread is massive in some markets (like Austin). It makes it difficult to underwrite the true starting point for an asset. Is market what the current tenants are paying? Is market the effective rent the new tenants are paying? I don't think either are totally correct since some level (50-60%) of those existing tenants will stay.

To me, it makes the most sense to split the analysis into two segments: 1) existing tenants and 2) new tenants. Model out renewal percentages and modest rate increases (or no increase). Then figure out a concession reduction plan for the new leases (a sizable increase in effective rents for them) as the supply wave subsides.

Underwriting is even more art than science today...unless you just fall back on "finding a good basis."

[Brian Milovich @BrianMilovich]

So many multifamily deals that we see today have a "gain" to lease...meaning, the in place rents are higher than today's market rents.

This makes sense. Rents spiked in 2021 and many were able to reset their rent rolls higher. Then, a supply wave in 2024 increased competition and forced rents down for new tenants moving in. The existing tenants are often paying higher rents than new tenants.

This isn't a new phenomenon. In many markets there are always specials to encourage new leases, or certain times of the year when incentives are needed (think January in Minnesota).

Today, though, the spread is massive in some markets (like Austin). It makes it difficult to underwrite the true starting point for an asset. Is market what the current tenants are paying? Is market the effective rent the new tenants are paying? I don't think either are totally correct since some level (50-60%) of those existing tenants will stay.

To me, it makes the most sense to split the analysis into two segments: 1) existing tenants and 2) new tenants. Model out renewal percentages and modest rate increases (or no increase). Then figure out a concession reduction plan for the new leases (a sizable increase in effective rents for them) as the supply wave subsides.

Underwriting is even more art than science today...unless you just fall back on "finding a good basis."

[Brian Milovich @BrianMilovich]

A 50bp move up in the 10yr UST to ~4.38% since April 4th and the market freaks out.

It's still below the January high of 4.8% and in line with Nov/Dec 2024 levels.

Just like any other investment, uncertainty creates challenges. Investors will delay new acquisitions and they will have no idea what interest rate they'll secure if they start the process of obtaining a new loan now. In all instances, there is a premium on certainty. Certainty of cash flow and interest rates.

Real estate desperately needs certainty (and rent growth) to move forward, and the trade war isn't helping.

[Brian Milovich @BrianMilovich]

A 50bp move up in the 10yr UST to ~4.38% since April 4th and the market freaks out.

It's still below the January high of 4.8% and in line with Nov/Dec 2024 levels.

Just like any other investment, uncertainty creates challenges. Investors will delay new acquisitions and they will have no idea what interest rate they'll secure if they start the process of obtaining a new loan now. In all instances, there is a premium on certainty. Certainty of cash flow and interest rates.

Real estate desperately needs certainty (and rent growth) to move forward, and the trade war isn't helping.